The major reason for
initiating the Annual Demographia International Housing
Affordability Surveys back in late 2004 with Wendell Cox of
Demographia, St Louis, USA - was to illustrate to
Australian’s and New Zealanders in particular at the time
- just how distorted their urban housing markets were in
comparison with responsibly governed urban markets
throughout much of middle North America (Canada and the
United States) – where housing does not exceed three times
gross annual household incomes.

The “Harvard
University JCHS Median Multiple Tables” illustrate this as
well.

Policymakers in both Australia and New Zealand
chose instead to ignore the significance of “housing
bubbles”, allowing these bubbles to further inflate –
and collapse. They will therefore need to be prepared to
deal with the consequences – in social, political and
economic terms going forward.

They will soon learn
too – that Governments and Reserve Banks do not have the
capacity to arrest the necessary adjustments of these
housing bubbles.

The only questions policymakers
will need to ask themselves going forward is – (a) to what
extent are they going to dither compounding problems and
allow the residential construction sectors to collapse –
and (b) – when do they intend to allow for the supply of
affordable land on the urban fringes, coupled with
appropriate debt financing of infrastructure, so that
housing at or below three times annual household income can
be built.

This will require State / National
politicians to deal “head on” with the difficulties too
many Local Authorities are having in meeting their social
obligations to ensure the provision of affordable
housing.

On a “build rate per 1000 population”
basis – California during 2008 will generate less
residential units than it did on average through each year
of the 1930’s. It is likely the same situation in the
United Kingdom currently. Both have current build rates of
less than 2.0 units / 1000 population. Around 3.0 / 1000 is
required for replacement (the US is currently only building
at the replacement rate overall).

It would be fair
to say that the prospective buyers generally (“bubble
bunnies” are rapidly becoming an extinct species) and the
finance sector globally, will be waiting patiently until
housing stock can be provided, at prices people can
realistically afford (example – “Houston Association of
Realtors latest Monthly Report”). It seems extremely
unlikely the finance sector will be in any hurry to provide
“fuel” for any further housing bubbles – as the costs
of the currently deflating bubbles to the survivors become
increasingly apparent.

The unfortunate reality is
that housing bubbles are extremely appealing to most people
– as inflating bubbles are the closest most will come to
“wealth creation” – even if it is an illusion – and
an extraordinarily dangerous illusion at that. This is
explained within “Getting performance urban planning in
place” and within my Op Ed on “Planetizen”.

In
essence – by playing this game - these “bubble
bunnies” become “mortgage slaves” on the self
inflicted road to poverty.

Politicians are attracted
to inflating housing bubbles as well – for their capacity
to generate short term "bubble revenue" and allow spending
to get out of control. The State Government of California is
currently grappling with the downside of this – as are
increasing numbers of other Governments globally.

Unfortunately – too many within the economics, urban
planning and property appraisal / valuation professions –
who have been "schooled" in markets, but not actually
"educated" in them with practical experience – have failed
professionally - by not informing policymakers and the wider
public of the real costs and consequences of housing
bubbles. Indeed – many have been more than willing to act
as "cheerleaders" for these bubbles.

Experienced
property development practitioners ("market developers")
know to exit bubble urban markets as soon as possible –
because in reality with land and construction inflation,
they are in real terms paying tax on illusory profits and
left holding "bubble value" land and property, which will
crash at some stage. So if their development businesses do
not fail because of cash flow problems in attempting to debt
and equity finance the inflation – the collapsing bubble
values will finish them (and their financiers) off in the
end.

The "market developers" are soon replaced with
the brave new breed of "planner developers" – who with
their bankers / financiers – appear blissfully unaware of
the risks (a word recently "rediscovered" in the finance
sector) of playing the "bubble game" (with the "stack up
merchants" in the investment / speculation sector – who
convince themselves that property will inflate
indefinitely). These "planner developers" are also willing
to take on additional substantial risks of capitulating to
urban planners and local politicians romantic ideas (much
time is spent together having "visions")– something
"market developers" strenuously resist, as the latter are
acutely aware of their social and commercial
responsibilities (don't go broke and hurt people) and the
heightened risks involved, should they capitulate.

"Market developers" view reputation as their most
important "asset". The reality is that "reputation" is a far
more robust consumer protection than "regulation".

The very necessary ability a "planner developer"
requires, is the capacity to engage in "romantic rhetoric"
– as this brilliant article (Irish blarney at its best!)
"Sunset on the property boom - The Irish Times - Sat, Sep
27, 2008" illustrates.

In New Zealand, with a
population of just 4.3 million, where around 32 finance
companies have failed to date, "planner developers" are
experiencing some considerable difficulties, as illustrated
with "Kensington Park" , "$450m housing project crashes - 22
Sep 2008 - NZ Herald: New Zealand National news". The
developers letters to "owners" and "contractors" make for
those not familiar with "development reality" –
instructive reading as well. Understandably New Zealand is
in recession as outlined within the UK Financial Times
article "New Zealand falls into first recession in 10
years" . This has been a "phony boom" – fueled in large
measure by a housing bubble.

Kensington Park is only
one of many residential developments currently experiencing
"difficulties" in New Zealand.

Yet surprisingly – there have been no estimates made
of the quantum of "bubble value' of inflated urban markets
globally. The figures that follow should be considered at
best "rough estimates" – and it is hoped that researchers,
with the recourses available, will generate more rigorous
research on this important issue. In particular Reserve
Banks, Government Housing Agencies and business / finance
media.

In attempting a "rough estimate' of the
extent of "housing bubble value" globally – let's start
with the United States with a population of 305 million and
2.6 people on average per occupied household (refer "US
Census information" – which indicates that there are
117,300,000 occupied (64% owner occupied – 36% rented) –
plus an additional approximately 10,000,000 other / second
homes – 127,300,000 residential units in total. In the
Ist Quarter 2007, the average price peaked at $US322,100 –
so that the total (rough) estimate value peaked at $US41
trillion – the usually occupied 117,300,000 units near
$US38 trillion.

To obtain a rough estimate of "real
value" - the Houston Association of Realtors latest "Monthly
Report" (click Homes for Sale – go down right side to
Market Report) for August 2008 (released Sept 3, 2008) is of
some help – as in the latest Demographia Survey, the
Median Multiple for this urban market was found to be
2.9.

Above 3.0 Median Multiple should be considered
"bubble value".

During August 2008, the urban
market of Houston with approximately 5.6 million people and
2,000,000 residential units sold via the Houston Association
of Realtors - 6641 residential units (all types) for a Total
Dollar Volume $US1,435,000,000 – indicating that the
average price was $US216,081 (median price about
$US160,000).

As indicated earlier – the average
price nationally in the United States peaked at $US322,100
and with the Houston average currently at $US216,081 this
would suggest that the difference of $US106,019 is roughly
"bubble value". To be more accurate, it would be more
appropriate to go back to the February 2007 average price in
Houston – and line this with the US national average
price. However – in using these latest "average figures"
as a base – it compensates for the slightly lower
household incomes in Houston.

Even with these
slightly lower incomes – Houstonians generally have a
better standard of living than New Yorkers as explained by
Professor Edward Gleaser of Harvard University within
“Houston, New York Has a Problem by Edward L. Glaeser,
City Journal Summer 2008”.

Houston's two million
housing stock is the equivalent of less than 1.3 times its
GDP ($US317 billion in 2005 according to the BEA of the US
Department of Commerce). It would appear that housing
markets should not exceed the equivalent of 1.5 times GDP /
GAP. If they do – this suggests major structural
distortions in a local economy.

It would appear that
approximately $US6 trillion of housing "bubble value" has
evaporated in the United States to date – in assessing
price movements as reported by Case Shiller and the National
Association of Realtors.

In rough terms – this
would suggest that there was approximately $US13.5 trillion
of "bubble value ($US106,019 x 127.3 million residential
units) – the equivalent of the United States GDP at
$US13.5 trillion approximately (2007 figures).In nominal
terms the United States with a 2007 GDP of $US13.5 trillion
is 25% of the world economy at $US54.3 trillion.

California – with its 13,300,0000 residential stock
and population of around 37 million, appears to have
generated approximately $US6 trillion of "bubble value",
with around $US3 trillion evaporating to date. At $US6
trillion, this would represent 44% of the total United
States "bubble value" of $US13.5 trillion. A remarkable
achievement - when California's population is 12% of the
United States total of 305 million.

This illustrates
how other factors, such as population growth and excess
liquidity (Did automobiles inflate? No. New automobile
prices in the United States actually fell by 2.5% in the
past 12 months)) are "secondary" to the major issues of land
supply and infrastructure financing. The law of supply and
demand is the key issue.

Assuming that United States
housing represents 25% of the value of housing throughout
the rest of the world – this would suggest that housing
globally may have reached a total value of at least ($US41
trillion x 4) of $US164 trillion – with at least (US13.5
trillion x 4) $US54 trillion of this being "bubble
value".

The "bubble problem" of the United States is
not as severe as it is in most other Anglo countries - as
illustrated by this year's 4th Annual Demographia
International Housing Affordability Survey - with Canada's
overall Median Multiple 3.1; United States 3.6; Republic of
Ireland 4.7; United Kingdom 5.5; Australia and New Zealand
6.3.

The problems in the United States have been
"amplified" by non recourse lending in approximately 25
States (problems arise – just throw the keys back at the
Bank – "jingle mail") and the opaque nature of mortgage
securitization generated by the finance sector (with the
attractive churn fees) – where under the stress of above
average "on the ground" defaults by borrowers, these
securitized products collapsed substantially in value. Yet
rather surprisingly – there has been no talk to date in
the United States of what would appear to be the obvious
need to "unbundle" these securitized products in an endeavor
to restore some sorely needed value to them.

Instead, there appears to be a certain hysteria to "re
– liquefy" the finance system, with a further $US700
billion bailout (bringing support to date to approximately
$US1.5 trillion in total). Further to this - Bill Gross of
Pimco is of the view that US Banks need a further $US500
billion of fresh capital as well.

One is in awe at
the ability of urban planners and the finance sector (who
prior to the bursting of the bubbles referred to themselves
as "Masters of the Universe") - in their ability to mess up
something as simple as "house mortgages".

Rather
surprisingly too – there has to date been no information
on the average foreclosure costs of urban markets and States
within the United States – so that the differences between
the "on the ground" foreclosure costs and how these are
amplified when mortgage products are securitized – can be
assessed. It would appear that the Total Dollar Volume of
foreclosure losses in Texas are running at around 5% of
those of California – for example.

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